SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17085
PEREGRINE PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3698422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14272 Franklin Avenue, Suite 100, Tustin, California 92780-7017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (714) 508-6000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED, SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES X NO__.
APPLICABLE ONLY TO CORPORATE ISSUERS:
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.)
100,989,765 shares of common stock
as of September 10, 2001
PEREGRINE PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2001
TABLE OF CONTENTS
THE TERMS "WE", "US", "OUR," AND "THE COMPANY" AS USED IN THIS FORM ON 10-Q
REFERS TO PEREGRINE PHARMACEUTICALS, INC. (FORMERLY KNOWN AS TECHNICLONE
CORPORATION) AND ITS WHOLLY-OWNED SUBSIDIARY VASCULAR TARGETING TECHNOLOGIES,
INC. (FORMERLY KNOWN AS PEREGRINE PHARMACEUTICALS, INC.).
PART I FINANCIAL INFORMATION
PAGE
Item 1. Our Financial Statements:
Consolidated Balance Sheets at July 31, 2001 and April 30, 2001.... 1
Consolidated Statements of Operations for the three months
ended July 31, 2001 and 2000 ...................................... 3
Consolidated Statement of Stockholders' Equity for the three
months ended July 31, 2001 ........................................ 4
Consolidated Statements of Cash Flows for the three months
ended July 31, 2001 and 2000 ...................................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 11
Company Overview .................... ............................ 11
Risk Factors of Our Company ...................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities and Use of Proceeds ........................ 16
Item 3. Defaults Upon Senior Securities .................................. 17
Item 4. Submission of Matters to a Vote of Security Holders .............. 17
Item 5. Other Information ................................................ 17
Item 6. Exhibits and Reports on Form 8-K.................................. 17
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 2001 AND APRIL 30, 2001
- --------------------------------------------------------------------------------
JULY 31, APRIL 30,
2001 2001
------------ ------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,868,000 $ 6,327,000
Other receivables, net of allowance of
$55,000 (July) and $54,000 (April) 32,000 46,000
Prepaid expenses and other current assets 277,000 264,000
------------ ------------
Total current assets 7,177,000 6,637,000
PROPERTY:
Leasehold improvements 208,000 208,000
Laboratory equipment 1,835,000 1,818,000
Furniture, fixtures and computer equipment 704,000 704,000
------------ ------------
2,747,000 2,730,000
Less accumulated depreciation and amortization (1,725,000) (1,613,000)
------------ ------------
Property, net 1,022,000 1,117,000
OTHER ASSETS:
Note receivable, net of allowance of $1,745,000
(July) and $1,759,000 (April) - -
Other, net 134,000 146,000
------------ ------------
Total other assets 134,000 146,000
------------ ------------
TOTAL ASSETS $ 8,333,000 $ 7,900,000
============ ============
1
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 2001 AND APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
JULY 31, APRIL 30,
2001 2001
------------- -------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 313,000 $ 675,000
Accrued clinical trial site fees 425,000 268,000
Accrued royalties and license fees 181,000 147,000
Accrued legal and accounting fees 91,000 206,000
Notes payable, current portion 60,000 86,000
Other current liabilities 406,000 309,000
Deferred license revenue 396,000 3,500,000
------------- -------------
Total current liabilities 1,872,000 5,191,000
NOTES PAYABLE - 2,000
DEFERRED LICENSE REVENUE - 21,000
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock-$.001 par value; authorized
150,000,000 shares; outstanding -
99,989,766 (July); 97,288,934 (April) 100,000 97,000
Additional paid-in capital 123,607,000 120,253,000
Deferred stock compensation (1,236,000) (935,000)
Accumulated deficit (116,010,000) (116,729,000)
------------- -------------
Total stockholders' equity 6,461,000 2,686,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,333,000 $ 7,900,000
============= =============
See accompanying notes to consolidated financial statements
2
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2001 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
2001 2000
-------------- --------------
LICENSE REVENUE $ 3,125,000 $ 104,000
OPERATING EXPENSES:
Research and development 2,041,000 1,545,000
General and administrative 466,000 687,000
-------------- --------------
Total operating expenses 2,507,000 2,232,000
-------------- --------------
INCOME (LOSS) FROM OPERATIONS 618,000 (2,128,000)
OTHER INCOME (EXPENSE):
Interest and other income 102,000 174,000
Interest expense (1,000) (103,000)
-------------- --------------
NET INCOME (LOSS) $ 719,000 $ (2,057,000)
============== ==============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ 0.01 $ (0.02)
============== ==============
SHARES USED IN CALCULATION OF INCOME
(LOSS) PER COMMON SHARE:
Basic 98,856,492 92,539,300
============== ==============
Diluted 103,242,811 92,539,300
============== ==============
See accompanying notes to consolidated financial statements
3
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL DEFERRED TOTAL
COMMON STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
-------------- -------------- -------------- -------------- -------------- --------------
BALANCES - May 1, 2001 97,288,934 $ 97,000 $ 120,253,000 $ (935,000) $(116,729,000) $ 2,686,000
Common stock issued upon
exercise of options and warrants 83,849 - 28,000 - - 28,000
Common stock issued for cash
under Equity Line 2,592,591 3,000 2,747,000 - - 2,750,000
Common stock issued upon conversion
of Equity Line warrants 24,392 - - - - -
Deferred stock compensation - - 579,000 (579,000) - -
Stock-based compensation - - - 278,000 - 278,000
Net income - - - - 719,000 719,000
-------------- -------------- -------------- -------------- -------------- --------------
BALANCES - July 31, 2001 99,989,766 $ 100,000 $ 123,607,000 $ (1,236,000) $(116,010,000) $ 6,461,000
============== ============== ============== ============== ============== ==============
See accompanying notes to consolidated financial statements
4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2001 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 719,000 $ (2,057,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 112,000 77,000
Stock-based compensation 278,000 327,000
Changes in operating assets and liabilities:
Other receivables 14,000 24,000
Prepaid expenses and other current assets (1,000) 86,000
Accounts payable and accrued legal and accounting fees (477,000) (67,000)
Deferred license revenue (3,125,000) 896,000
Accrued clinical trial site fees 157,000 56,000
Other accrued expenses and current liabilities 131,000 126,000
------------- -------------
Net cash used in operating activities (2,192,000) (532,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (17,000) (90,000)
------------- -------------
Net cash used in investing activities (17,000) (90,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,778,000 9,226,000
Principal payments on notes payable (28,000) (27,000)
------------- -------------
Net cash provided by financing activities 2,750,000 9,199,000
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 541,000 $ 8,577,000
CASH AND CASH EQUIVALENTS, beginning of period 6,327,000 4,131,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 6,868,000 $ 12,708,000
============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,000 $ 4,000
============= =============
See accompanying notes to consolidated financial statements
5
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial
statements include the accounts of Peregrine Pharmaceuticals, Inc. (the
"Company") (formerly known as Techniclone Corporation) and its wholly owned
subsidiary, Vascular Targeting Technologies, Inc. (formerly known as Peregrine
Pharmaceuticals, Inc.). The Company acquired the Vascular Targeting Agent
("VTA") technology through the acquisition of its wholly owned subsidiary in
April 1997. All intercompany balances and transactions have been eliminated.
At August 31, 2001, the Company had $7,221,000 in cash and cash
equivalents. The Company has expended substantial funds on the development of
product candidates and for clinical trials. As a result, we have had negative
cash flows from operations since inception and expect the negative cash flows
from operations to continue until the Company is able to generate sufficient
revenue from the sale and/or licensing of its products. Although the Company has
sufficient cash on hand to meet its obligations on a timely basis for at least
the next twelve months based on its historical operational spending rate
(excluding any future draws under the Company's Common Stock Equity Line of
Credit), the Company will continue to require additional funding to sustain its
research and development efforts, provide for future clinical trials, establish
contract manufacturing and product commercialization capabilities, and continue
operations until the Company is able to generate sufficient revenue from the
sale and/or licensing of its product candidates. The Company plans to obtain
required financing through one or more methods including, obtaining additional
equity or debt financing and negotiating additional licensing or collaboration
agreements with other companies.
The Company's ability to access funds under the Equity Line Agreement
is subject to the satisfaction of certain conditions and the failure to satisfy
these conditions may limit or preclude the Company's ability to access such
funds (Note 4).
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at July 31, 2001, and the consolidated results
of its operations and its consolidated cash flows for the three-month periods
ended July 31, 2001 and 2000. Although the Company believes that the disclosures
in the financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
the consolidated financial statements have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities Exchange Act of 1934. The
consolidated financial statements included herein should be read in conjunction
with the consolidated financial statements of the Company, included in the
Company's Annual Report on Form 10-K for the year ended April 30, 2001, which
was filed with the Securities and Exchange Commission on July 27, 2001. Results
of operations for the interim periods covered by this Report may not necessarily
be indicative of results of operations for the full fiscal year.
RECLASSIFICATION. Certain reclassifications were made to the prior
period balances to conform them to the current period presentation.
6
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE. Basic net income (loss) per share
is calculated in accordance with Statement of Financial Accounting Standards No.
128 "Earnings per Share." Basic net income (loss) per share is computed by
dividing the net income (loss) by the weighted average number of common shares
outstanding during the period and excludes the dilutive effects of option and
warrants. Diluted net income per common share is computed by dividing the net
income by the sum of the weighted average number of common shares outstanding
during the period plus the dilutive effects of options and warrants outstanding
during the period. Diluted net income per common share for the three months
ended July 31, 2001 includes the dilutive effect of 4,386,319 shares of
potentially issuable common stock from the exercise of options and warrants and
excludes 789,076 shares of potentially issuable common stock from the exercise
of options and warrants because their effect was antidilutive. Dilutive net loss
per common share for the three months ended July 31, 2000 exclude 5,273,593
shares issuable upon the exercise of outstanding options and warrants because
their effect was antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life created by
business combinations accounted for using the purchase method of accounting.
Instead, goodwill and intangible assets deemed to have an indefinite useful life
will be subject to an annual review for impairment. The new standards will
generally be effective May 1, 2002 and for purchase business combinations
consummated after June 30, 2001. The Company believes that adopting SFAS 141 and
SFAS 142 will not have a material impact on its consolidated financial position
and results of operations.
Effective May 1, 2001, the Company adopted Statement of Financial
Accounting Standards No.133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
an entity to recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
The adoption of SFAS 133 had no impact on the Company's financial position or
the results of operations.
2. NOTE RECEIVABLE
During December 1998, the Company completed the sale and subsequent
leaseback of its two facilities and recorded an initial note receivable from the
buyer of $1,925,000. In accordance with the related lease agreement, if the
Company is in default under the lease agreement, including but not limited to,
filing a petition for bankruptcy or failure to pay the basic rent within five
(5) days of being due, the note receivable shall be deemed to be immediately
satisfied in full and the buyer shall have no further obligation to the Company
for such note receivable. Although the Company has made all payments under the
lease agreement and has not filed for protection under the laws of bankruptcy,
during the quarter ended October 31, 1999, the Company did not have sufficient
cash on hand to meet its obligations on a timely basis and was operating at
significantly reduced levels. In addition, at that time, if the Company could
not raise additional cash by December 31, 1999, the Company would have had to
file for protection under the laws of bankruptcy. Due to the uncertainty of the
Company's ability to pay its lease obligations on a timely basis, the Company
established a 100% reserve for the note receivable in the amount of $1,887,000
as of October 31, 1999. The Company reduces the reserve as payments are received
and records the
7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
reduction as Interest and other income in the accompanying consolidated
statement of operations. Due to the uncertainty of the Company's capital
resources beyond the next twelve (12) months and its ability to pay its lease
obligation beyond the next twelve (12) months, the carrying value of the note
receivable approximates its fair value at July 31, 2001. The Company has
received all payments through September 2001. The following represents a
rollforward of the allowance of the Company's note receivable for the quarter
ended July 31, 2001:
Allowance for note receivable, April 30, 2001 $ 1,813,000
Payments received (13,000)
-------------
Allowance for note receivable, July 31, 2001 $ 1,800,000
=============
3. LICENSING
During September 1995, the Company entered into an agreement with
Cancer Therapeutics, Inc. whereby the Company granted to Cancer Therapeutics,
Inc. the exclusive right to sublicense TNT to a major pharmaceutical company
solely in the People's Republic of China for a period of 10 years, subject to
the major pharmaceutical company obtaining product approval within 36 months. In
exchange for this right, the major pharmaceutical company would be required to
fund not less than $3,000,000 for research and development expenses of Cancer
Therapeutics related to TNT and the Company would retain exclusive rights to all
research, product development and data outside of the People's Republic of
China. The technology was then sublicensed to Shanghai Brilliance
Pharmaceuticals, Inc. ("Brilliance"). In addition, the Company is entitled to
receive 50% of all revenues received by Cancer Therapeutics with respect to its
sublicensing of TNT to Brilliance. Cancer Therapeutics has the right to 20% of
the distributed profits from Brilliance. During March 2001, the Company extended
the exclusive licensing period granted to Cancer Therapeutics, which now expires
on December 31, 2016. Dr. Clive Taylor, a member of the Company's Board of
Directors, owns 26% of Cancer Therapeutics and is an officer and director of
Cancer Therapeutics. Dr. Taylor has abstained from voting at meetings of the
Company's board of directors on any matters relating to Cancer Therapeutics or
Brilliance. Through July 31, 2001, Cancer Therapeutics has not derived any
revenues from its agreement with Brilliance.
On September 6, 2001, the Company entered into a development agreement
for TNT in the People's Republic of China with Medipharm Biotech, Co., Ltd. of
Shanghai, China (formerly known as Shanghai Brilliance Pharmaceuticals). Under
the terms of the agreement, Peregrine will provide product development services
to prepare TNT for commercial scale production. In addition, the Company will
provide contract manufacturing services to Medipharm Biotech, Co., Ltd. pending
Chinese State Drug Administration marketing approval of TNT in the People's
Republic of China and authorization of Peregrine as a contract manufacturer.
4. STOCKHOLDERS' EQUITY
During June 1998, the Company secured access to a Common Stock Equity
Line ("Equity Line") with two institutional investors, as amended on June 2,
2000 (the Amendment). Under the amended terms of the Equity Line, the Company
may, in its sole discretion, and subject to certain restrictions, periodically
sell shares of the Company's common stock until all common shares previously
registered under the Equity Line have been exhausted. As of August 31, 2001, the
Company had approximately 1,512,000 unissued shares available under the Equity
Line for future Puts. At a closing bid price of $1.40 per share, the Company
could raise up to approximately $1.5 million under its Equity Line. Future Puts
are priced at a discount equal to the greater of 17.5% of the lowest closing bid
8
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
price during the ten trading days immediately preceding the date on which such
shares are sold to the institutional investors or $0.20. At the time of each
Put, the investors will be issued warrants, which are immediately exercisable on
a cashless basis only and expire through December 31, 2005, to purchase up to
15% of the amount of common stock issued to the investors at the same price as
the shares of common stock sold in the Put.
In accordance with Emerging Issues Task Force Issue No. 96-13,
"Accounting for Derivative Financial Instruments," contracts that require a
company to deliver shares as part of a physical settlement should be measured at
the estimated fair value on the date of the initial Put. The Equity Line solely
requires settlement to be made with shares of the Company's common stock. As
such, the Company had an independent appraisal performed to determine the
estimated fair market value of the various financial instruments included in the
Equity Line and recorded the related financial instruments as reclassifications
between equity categories. Reclassifications were made for the estimated fair
market value of the warrants issued and estimated Commitment Warrants to be
issued under the Equity Line of $1,140,000 and the estimated fair market value
of the reset provision of the Equity Line of $400,000 as additional
consideration and have been included in the accompanying consolidated financial
statements. The above recorded amounts were offset by $700,000 related to the
restrictive nature of the common stock issued under the initial Put in June 1998
and the estimated fair market value of the Equity Line Put option of $840,000.
During January 2001, the Emerging Issues Task Force ("EITF") issued
EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled In, The Company's Own Stock" which reached a consensus on
the application of EITF 96-13. In accordance with EITF 00-19, the Equity Line
contract remains recorded as permanent equity and recorded at fair value as of
the date of the transaction. EITF 00-19 is effective for all transactions
entered into after September 20, 2000. As of July 31, 2001, EITF 00-19 had no
impact on the Company's consolidated financial statements.
During the quarter ended July 31, 2001, the Company received gross
proceeds of $3,000,000, in exchange for 2,356,901 shares of common stock issued
to two institutional investors under the Equity Line. In connection with the
Equity Line draws during the quarter ended July 31, 2001, the Company (i) issued
235,690 shares of common stock, (ii) issued warrants to purchase up to 23,568
shares of common stock, and (iii) paid cash commissions of $210,000, to Dunwoody
Brokerage Services, Inc. as placement agent fees. Mr. Eric Swartz, a member of
the Board of Directors, maintains a contractual right to 50% of the placement
agent fees paid under the Equity Line. The Equity Line was consummated in June
1998 when Mr. Swartz had no Board affiliation with the Company.
During August 2001, the Company received gross proceeds of $1,500,000
under the Equity Line in exchange for 999,999 shares of the Company's common
stock, including placement agent fees.
9
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
5. SUBSEQUENT EVENTS
During August, 2001, the Company entered into two exclusive worldwide
licenses for two new pre-clinical compounds from the University of Texas System.
These two new compounds add to Peregrine's anti-cancer platform technologies in
the anti-angiogenesis and vascular targeting agent fields. Under the license
agreements, the Company will pay an up-front fee, milestone payments based on
development progress, plus a royalty on net sales.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Except for historical information contained herein, this Quarterly
Report on Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. In light of the important factors that can materially affect results,
including those set forth elsewhere in this Form 10-Q, the inclusion of
forward-looking information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved. When used in this Form 10-Q, the words "may," "should," "plans,"
"believe," "anticipate," "estimate," "expect," their opposites and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements.
The following discussion is included to describe the Company's
financial position and results of operations for the quarter ended July 31, 2001
compared to the same period in the prior year. The consolidated financial
statements and notes thereto contain detailed information that should be
referred to in conjunction with this discussion. In addition, the consolidated
financial statements included herein should be read in conjunction with the
consolidated financial statements of the Company, included in the Company's
Annual Report on Form 10-K for the year ended April 30, 2001, which was filed
with the Securities and Exchange Commission on July 27, 2001. Results of
operations for the interim periods covered by this Report may not necessarily be
indicative of results of operations for the full fiscal year.
COMPANY OVERVIEW. Peregrine Pharmaceuticals, Inc. (formerly Techniclone
Corporation), located in Tustin, California, is a biopharmaceutical company
engaged in the development and commercialization of cancer therapeutics and
cancer diagnostics through a series of patented technologies.
Our main focus is on the development of our collateral targeting agent
technologies. Collateral targeting agents typically use antibodies that bind to
or target components found in or on most solid tumors. An antibody is a
naturally occurring molecule that humans and other animals create in response to
disease. In pre-clinical and/or clinical studies, these antibodies are capable
of targeting and delivering therapeutic killing agents that kill cancerous tumor
cells. We currently have exclusive rights to over 40 issued U.S. and foreign
patents protecting various aspects of our technology and have additional pending
patent applications that we believe will further strengthen our patent position.
Our three collateral targeting technologies are known as tumor necrosis therapy,
vascular targeting agents and vasopermeation enhancement agents, and are
discussed in greater detail in our Form 10-K for the year ended April 30, 2001,
which was filed with the Securities and Exchange Commission on July 27, 2001.
In addition to collateral targeting agents, we have a direct
tumor-targeting agent, Oncolym(R), for the treatment of non-Hodgkin's B-cell
lymphoma. The Oncolym(R) antibody is linked to a radioactive iodine molecule and
the combined agent is injected into the blood stream of the lymphoma patient
where it recognizes and binds to the cancerous lymphoma tumor sites, thereby
delivering the radioactive isotope directly to the tumor site.
RESULTS OF OPERATIONS. Before we discuss the Company's total expenses
(cash and non-cash expenses), we would like to discuss the Company's operational
burn rate (cash expenses used in operations, net of interest and other income)
for the quarter ended July 31, 2001 compared to the same period in the prior
year. The operational burn rate is calculated by taking the net income (loss)
11
from operations and subtracting all non-cash items, such as the recognition of
deferred license revenue, depreciation and amortization and stock-based
compensation expense.
The Company's operational burn rate of $2,016,000 (or $ 672,000 per
month) for the quarter ended July 31, 2001, as compared to the operational burn
rate of $1,757,000 (or $586,000 per month) for the quarter ended July 31, 2000,
represents an increase of $259,000 (or $86,000 per month). The increase in the
operational burn rate primarily relates to an increase in expenses associated
with the ongoing Phase II clinical trial using Cotara(TM) for the treatment of
brain cancer, the Phase I studies at Stanford University Medical Center using
Cotara(TM) for the treatment of colorectal, pancreatic and soft-tissue sarcoma
cancers and the Phase I study at Mayo Clinic using Cotara(TM) for the treatment
of liver cancer. In addition, there was a current quarter increase in salaries
expense primarily due to a higher number of employees in the Clinical Trials
Department to support our increased clinical trial activities combined with an
increase in sponsored research fees associated with our development of the VEA
and VTA technologies. The current quarter increase in cash expenses was offset
by a decrease in interest expense due to a lower outstanding note payable
balance during the current quarter.
Our total operational burn rate may vary substantially from quarter to
quarter based on patient enrollment rates of our ongoing clinical trial programs
and the funding of non-recurring items, which may include but are not limited
to, items associated with product development, in-house manufacturing, contract
radiolabeling and the related commercial scale-up efforts of contract
manufacturing and contract radiolabeling.
NET INCOME. The Company recorded net income of approximately $719,000
for the quarter ended July 31, 2001 compared to a net loss of approximately
$2,057,000 for the quarter ended July 31, 2000. The net income recorded during
the quarter ended July 31, 2001 is primarily due to the recognition of deferred
license revenue of $3,021,000 combined with a decrease in interest expense of
$102,000. These amounts were offset by an increase in total operating expenses
of $275,000 and a decrease in interest and other income of $72,000.
LICENSE REVENUE. The increase in license revenue of $3,021,000 during
the three months ended July 31, 2001 compared to the same period in the prior
year resulted primarily from the recognition of a $3,000,000 up-front licensing
payment received from Schering A.G. in March 1999. The Company recognized the
deferred license revenue upon the Company re-acquiring the licensing rights from
Schering A.G. and meeting all of its obligations under the agreement in June
2001.
TOTAL OPERATING EXPENSES. The Company's total operating expenses
increased $275,000 during the three months ended July 31, 2001 compared to the
same period in the prior year. The increase in total operating expenses is
primarily due to an increase in research and development expenses of $496,000
offset by a decrease in general and administrative expenses of $221,000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include internal salary expenses, contracted clinical trial fees, building lease
and facility expenses, contract research expenses, sponsored research expenses
for two universities, material and supplies for the research and manufacturing
laboratories, patent legal fees, stock-based compensation expense, utilities and
other general research costs. The increase in research and development expenses
of $496,000 during the three months ended July 31, 2001 compared to the same
period in the prior year is primarily due to an increase in clinical trial
expenses associated with the ongoing Phase II clinical trial using Cotara(TM)
for the treatment of brain cancer, the Phase I studies at Stanford University
12
Medical Center using Cotara(TM) for the treatment of colorectal, pancreatic and
soft-tissue sarcoma cancers and the Phase I study at Mayo Clinic using
Cotara(TM) for the treatment of liver cancer. The above increases were
supplemented by an increase in payroll expense primarily due to an increase in
staff in the Clinical Trials Department to support our increased clinical trial
activities combined with an increase in sponsored research fees associated with
our VEA and VTA technologies. In addition, the current three-month increase was
supplemented by an increase in stock-based compensation expense associated with
the fair value of options granted to non-employee consultants of the Company
during May 2001 who are assisting the Company with the development of its
platform technologies. The current three-month period increase in research and
development expenses was offset by a decrease in Oncolym(R) development expenses
resulting from the forgiveness of amounts due and payable to Schering A.G. when
the Company re-acquired the Oncolym(R) technology. TNT drug development expenses
recorded in the prior three-month period. The following represents additional
information on the Company's research and development costs incurred by major
project.
R&D R&D R&D
EXPENSES- EXPENSES- EXPENSES-MAY
QUARTER ENDED QUARTER ENDED 1, 1998 TO JULY
MAJOR R&D PROJECT JULY 31, 2001 JULY 31, 2000 JULY 31, 2001
- ----------------------------- ------------ ------------ ------------
TNT development
(Cotara(TM)) $ 1,452,000 $ 1,016,000 $12,559,000
VEA development 335,000 59,000 1,374,000
VTA development 128,000 81,000 1,623,000
Oncolym(R)development 126,000 389,000 11,828,000
------------ ------------ ------------
Total R&D expenses $ 2,041,000 $ 1,545,000 $27,384,000
============ ============ ============
From inception to April 1998, we have expensed $20,898,000 on research
and development of our product candidates, with the costs primarily being
closely split between TNT development and Oncolym(R) development. In addition to
the above costs, the Company expensed an aggregate of $32,004,000 for the
acquisition of the TNT and VTA technologies, which were acquired during fiscal
year 1995 and 1997, respectively.
We have expended substantial funds on the research, development and
clinical trials of our product candidates and we expect to incur significant
additional research and development costs in the foreseeable future until we are
able to generate sufficient revenue from the sale and/or licensing of our
products. Although we have sufficient cash on hand to meet our obligations on a
timely basis through the next twelve (12) months based on our historical cash
used in operations, we will continue to require additional funding to sustain
our research and development efforts, provide for additional clinical trials,
expand our manufacturing and product commercialization capabilities, and
continue our operations. Although we expect research and development expenses to
increase over the foreseeable future as we fund additional clinical trials and
our product development efforts, we have the ability to control our spending
rate and development plans based on the capital resources of the Company.
It is extremely difficult for us to reasonably estimate any future
research and development costs due to the number of unknowns and uncertainties
associated with clinical trial development. These unknowns and uncertainties
include, but are not limited to:
o The uncertainty of future costs associated with our pre-clinical
candidates, vasopermeation enhancement agents, and vascular
targeting agents, which costs are dependent on the success of
13
pre-clinical development. We are uncertain whether or not these
product candidates will be successful and we are uncertain whether
or not we will incur any additional costs beyond pre-clinical
development.
o The uncertainty of future clinical trial results.
o The uncertainty of the number of patients to be treated in any
clinical trial.
o The uncertainty of the Food and Drug Administration allowing our
studies to move forward from Phase I clinical studies to Phase II
and Phase III clinical studies.
o The uncertainty of the rate at which patients are enrolled into our
studies. Any delays in clinical trials could significantly increase
the cost of the study and would extend the estimated completion
dates.
o The uncertainty of the Company's capital resources to fund these
studies beyond the next twelve months.
o The uncertainty of protocol changes and modifications in the design
of our clinical trial studies, which may increase or decrease our
future costs.
We will need to do additional development and clinical testing prior to
seeking any regulatory approval for commercialization of our product candidates
as all of our products are in clinical and pre-clinical development. Testing,
manufacturing, commercialization, advertising, promotion, export and marketing,
among other things, of our proposed products are subject to extensive regulation
by governmental authorities in the United States and other countries. The
testing and approval process requires substantial time, effort and financial
resources, and we cannot guarantee that any approval will be granted on a timely
basis, if at all. Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in conducting advanced human clinical trials,
even after obtaining promising results in earlier trials. Furthermore, the
United States Food and Drug Administration may suspend clinical trials at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. Even if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. Accordingly, we may experience difficulties and
delays in obtaining necessary governmental clearances and approvals to market
our products, and we may not be able to obtain all necessary governmental
clearances and approvals to market our products.
GENERAL AND ADMINISTRATIVE EXPENSES. The decrease in general and
administrative expenses of $221,000 during the three months ended July 31, 2001
compared to the same period in the prior year resulted primarily from a decrease
in stock-based compensation expense associated with the amortization of the fair
value of warrants granted in prior years which were fully amortized as of April
30, 2001. The above decrease was offset by increases in public relation expenses
and travel expenses associated with our President and CEO's ongoing road show.
INTEREST AND OTHER INCOME. The decrease in interest and other income of
$72,000 during the three months ended July 31, 2001 compared to the same period
in the prior year is primarily due to a decrease in interest income as a result
of a decrease in interest rates combined with a lower average cash balance on
hand during the quarter ended July 31, 2001 compared to the same period in the
prior year.
INTEREST EXPENSE. The decrease in interest expense of $102,000 for the
three months ended July 31, 2001 compared to the same period in the prior year
is primarily due to the Company's lower average outstanding note payable balance
during the quarter ended July 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES. As of August 31, 2001, the Company had
$7,221,000 in cash and cash equivalents. The Company has financed its operations
primarily through the sale of common stock, which has been supplemented with
14
payments received from various licensing deals. During the quarter ended July
31, 2001, the Company received gross proceeds of $2,779,000 from the sale of
common stock and the exercise of stock options. Without obtaining additional
financing or entering into additional licensing arrangements for the Company's
other product candidates, the Company believes that it has sufficient cash on
hand (excluding any future draws under the Equity Line), to meet its obligations
on a timely basis for at least the next twelve months based on its historical
operational spending rate.
The Company has experienced negative cash flows from operations since
its inception and expects the negative cash flows from operations to continue
for the foreseeable future. The Company expects operating expenditures related
to clinical trials to increase in the future as the Company's clinical trial
activity increases and scale-up for clinical trial production and radiolabeling
continues. As a result of increased activities in connection with the clinical
trials for Cotara(TM) and Oncolym(R), and the development costs associated with
Vasopermeation Enhancement Agents (VEAs), the Company expects that the monthly
negative cash flow will continue. The development of the Company's Vascular
Targeting Agent (VTA) technology will be funded primarily by OXiGENE, Inc. under
a joint venture agreement entered into during May 2000, whereby OXiGENE, Inc.
will be funding up to $20,000,000 in development costs. Through July 31, 2001,
OXiGENE has funded $1,392,000 in expenses under the joint venture.
The Company has the ability, subject to certain conditions, to obtain
future funding under the Equity Line, as amended on June 2, 2000, whereby, the
Company may, in its sole discretion, and subject to certain restrictions,
periodically sell ("Put") shares of the Company's common stock until all common
shares previously registered under the Equity Line have been exhausted. As of
August 31, 2001, the Company had approximately 1,512,000 unissued shares
available under the Equity Line for future Puts. At a closing bid price of $1.40
per share, the Company could raise up to approximately $1.5 million under its
Equity Line. Future Puts are priced at a discount equal to the greater of 17.5%
of the lowest closing bid price during the ten trading days immediately
preceding the date on which such shares are sold to the institutional investors
or $0.20. At the time of each Put, the investors will be issued warrants, which
are immediately exercisable on a cashless basis only and expire through December
31, 2005, to purchase up to 15% of the amount of common stock issued to the
investors at the same price as the shares of common stock sold in the Put.
COMMITMENTS. At July 31, 2001, we had no material capital commitments,
although we have significant obligations, most of which are contingent on
clinical trial development milestones, for payments to licensors for their
technologies and in connection with the acquisition of the Oncolym(R) rights
previously owned by Alpha Therapeutic Corporation ("Alpha").
RISK FACTORS OF OUR COMPANY
The biotechnology industry includes many risks and challenges. Our
challenges may include, but are not limited to: uncertainties associated with
completing pre-clinical and clinical trials for our technologies; the
significant costs to develop our products as all of our products are currently
in development, pre-clinical studies or clinical trials and no revenue has been
generated from commercial product sales; obtaining additional financing to
support our operations and the development of our products; obtaining regulatory
approval for our technologies; complying with governmental regulations
applicable to our business; obtaining the raw materials necessary in the
development of such compounds; consummating collaborative arrangements with
corporate partners for product development; achieving milestones under
15
collaborative arrangements with corporate partners; developing the capacity to
manufacture, market and sell our products, either directly or indirectly, with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; attracting and retaining key personnel; protecting proprietary rights;
accurately forecasting operating and capital expenditures, other capital
commitments, or clinical trial costs and general economic conditions. A more
detailed discussion regarding the Company's industry and business risk factors
can be found in the Company's Annual Report on Form 10-K for the year ended
April 30, 2001, as filed with the Securities and Exchange Commission on July 27,
2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Changes in United States interest rates would affect the interest
earned on the Company's cash and cash equivalents. Based on the Company's
overall interest rate exposure at July 31, 2001, a near-term change in interest
rates, based on historical movements, would not materially affect the fair value
of interest rate sensitive instruments. The Company's debt instruments have
fixed interest rates and terms and, therefore, a significant change in interest
rates would not have a material adverse effect on the Company's financial
position or results of operations.
PART II OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS. None.
- ------- ------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------- ------------------------------------------
The following is a summary of transactions by the Company during the
quarterly period of May 1, 2001 through July 31, 2001 involving issuance and
sales of the Company's securities that were not registered under the Securities
Act of 1933, as amended (the "Securities Act").
On various dates during the quarter ended July 31, 2001, the Company
issued 24,392 shares of common stock to one institutional investor upon the
cashless exercise of 65,656 warrants under the Equity Line.
On various dates during the quarter ended July 31, 2001, the Company
issued an aggregate of 2,592,591 shares of the Company's common stock to the two
institutional investors and the placement agent under the Equity Line, for an
aggregate purchase price of $3,000,000, pursuant to an Equity Line draw and also
issued warrants to the two institutional investors and placement agent to
purchase up to 377,102 shares of common stock, which warrants are immediately
exercisable on a cashless basis only and expire through December 31, 2005.
The issuances of the securities of the Company in the above
transactions were deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering. The recipient of such
securities either received adequate information about the Company or had access,
through employment or other relationships with the Company, to such information.
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
- ------- --------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
- ------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
- ------- ------------------
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K. None.
- ------- --------------------------------
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEREGRINE PHARMACEUTICALS, INC.
By: /s/ Edward J. Legere
---------------------------
Edward J. Legere
President & Chief Executive
Officer and Director
/s/ Paul J. Lytle
----------------------------
Paul J. Lytle
Vice President of Finance
and Accounting (signed both
as an officer duly
authorized to sign on behalf
of the Registrant and
principal financial officer
and chief accounting
officer)
18